The High Stakes in Controlled Substances Exclusion Case

Exclusions based on a policyholder’s knowledge are notoriously hard to resolve at summary judgment. Judge Robart, in Washington’s Western District, demonstrated this in his recent decision in Anderson v. Country Mutual Insurance Company, 2015 WL 687399 (W.D. Wn. Feb. 18, 2015).

The claim began with a fire caused by an overloaded electrical outlet in a Seattle house. While investigating the fire, the Seattle Fire Department found false walls, and a specialized venting and air-filtering system, all part of an illegal marijuana growing operation in the basement. The policyholder claimed to have been leasing the property for the preceding 19 months, and that he didn’t know about the grow operation in the basement. The fire investigation found little evidence that a tenant had been on the property, but did find some of the policyholder’s personal effects in the house.

When asked about his whereabouts on the day of the fire, the policyholder initially claimed to be golfing. When it turned out the course had been closed on the day of the fire, the policyholder then claimed to have been visiting a prostitute. When confronted with his false statement, the policyholder asserted he only wished to prevent his daughter from finding out he was in the company of a prostitute.

County Mutual denied coverage on the basis of the misrepresentation and controlled substances exclusions in its policy. The misrepresentation exclusion precludes coverage if the policyholder misrepresents any material fact relating to the insurance. The controlled substances exclusion bars coverage when illegal manufacture of controlled substances causes the loss, and the policyholder knows illegal substances are being manufactured.

County Mutual unsuccessfully moved for summary judgment on its controlled substances exclusion. Judge Robart held Country Mutual failed to establish that the policyholder actually knew – as the exclusion requires – there was a marijuana growing operation on his property.

County Mutual also failed to establish immunity from extra-contractual claims under Washington’s Fraud Reporting Immunity Act. This law shields an insurer from extra-contractual damages if it relies upon a written opinion from a law enforcement or public agency that criminal activity related to the claim is being investigated, or a crime has been charged, and the policyholder is a target of the investigation. Judge Robart found Country Mutual was not entitled to immunity because the Seattle Police Department had not issued a “written opinion” on the investigation, as the statute requires, at the time County Mutual denied coverage.

The policyholder was also unsuccessful at summary judgment, and Judge Robart allowed County Mutual to proceed to trial on whether the policyholder’s alleged misrepresentations, both before and after the denial of coverage, were material.